Is the Rise of Financial Digital Disruptors Knocking Traditional Banks Off the Track?

Abstract

The long-term fallout from the 2008 global financial crisis created several deep fractures in traditional-banking models. Most of the sectoral attention today has focused on weak operating profits and balance-sheet performance, especially the risks arising from the negative-rates environment and the collapse in yields on traditional assets, such as highly rated sovereign and corporate debt. Second-tier concerns in boardrooms and amidst C-level executives relate to the continuously evolving regulatory and supervisory pressures and rising associated costs. Finally, the anemic dynamics of the global economic recovery are also seen as a key risk to traditional banks’ profitability. However, from the longer-term perspective, the real risks to the universal banks’ well-established business model come from an entirely distinct direction: the digital-disruption channels that simultaneously put pressure on big banks’ core earnings lines and create ample opportunities for undermining the banking sector’s key unique selling proposition — that is, security of customer funds, data and transactions, and by corollary, enhancing customer loyalty. These channels are FinTech innovations — including rising data intensity of products on offer and technological threats, such as rising risks to cybersecurity. This two-pronged challenge is not unique to the banking sector, but its disruptive potential is a challenge that today’s traditional banking institutions are neither equipped to address nor fully enabled to grasp.